Distributed generation: a step forward in United States energy policy.

• Author: Bluvas, Kristin

1. INTRODUCTION

   On August 14, 2003, the East Coast of the United States and parts of Canada experienced one of the largest blackouts in history. (1) The blackout originated in a small area in Ohio, yet ultimately affected over fifty million people in eight states and one Canadian province. (2) In the end, the total cost estimates were between four billion and ten billion dollars. (3) This recent example illustrates the level of national dependency and instability that our electricity system allows. This current state of our electricity grid has resulted from a combination of government regulatory actions and natural market forces. (4) Naturally, then, the solution must be likewise multi-faceted. (5) Distributed Generation (6) offers one micro solution to this macro problem by encouraging more localized generation through smaller, closed systems. This Comment will argue that the federal government, through policy incentives and law, should be promoting distributed generation to supplement and stabilize our current grid and to allow more widespread use of renewable resources.

   This Comment will discuss the feasibility of, and problems with, distributed generation as a solution to the energy problems currently faced by the United States, focusing on federal initiatives that should be undertaken. Part II briefly discusses the history of electricity generation in the United States, explaining the background on how the current landscape developed. Part III explores the Energy Policy Act of 2005, which is the federal statute that sets forth the federal government's energy policy. (7) Specifically, Part III discusses renewable energy and distributed generation policy on the federal level and how the slack left in federal policy falls on the states to make up. Part IV discusses the problems with our current system and suggests why it is not a sustainable long-term solution to meet future electricity needs. This part includes a discussion of externalities that are unaccounted for in traditional electricity generation, and the widely underestimated problem of grid unreliability. Part V introduces distributed generation as one potential solution to these current problems. Also discussed in this part is distributed generation as a vehicle for introducing renewable energy sources into the grid. Part VI offers some ideas for realistically integrating distributed generation into our grid on a large-scale basis including: load response programs or incentives, federal encouragement of local installed capacity markets, federal net metering standards, and federal municipality incentives and tax credits to offset costs. Lastly, Part VII looks at New York's approach to distributed generation and how it differs in scope and level of commitment from the federal approach. Overall, the federal response and action toward distributed power generation has been a failure, forcing the states to intervene independently.

2. HISTORY OF ELECTRICITY MARKET DEREGULATION

   The late 1800s marked the electrification of the United States. With it, small privately owned generators began serving customer's electric power needs at cost-based prices. (8) However, many factors pushed the nation to restructure this localized system into a privately-owned, centralized system. (9) As a result, during the early 1900s, many of the small generation resources were purchased by larger privately-owned holding companies, (10) and by 1930, about sixteen companies owned seventy-five percent of the generators in the United States. (11)

   In response to the changing industry, Congress enacted the Public Utility Holding Company Act, (12) which initiated the regulation of such holding companies. (13) Furthermore, Congress created the Federal Power Commission in 1935, which eventually became the Federal Energy Regulatory Commission (FERC) in 1977.14 Also at this time, the federal government began to subsidize target development of power systems through legislation such as the Rural Electrification Act, (15) where loans and assistance were given to electricity providers in rural areas. (16) During this period, numerous hydroelectric dams were built by the federal government to provide low cost electricity to the public. (17) By 1941, generation growth was averaging about eight percent per year, (18) and the number of privately-owned generation resources had decreased significantly as federally-built generation continued to increase. (19) Regulation of this industry continued until the 1990's, when FERC began unbundling the electricity industry with the Energy Policy Act of 1992 (hereinafter EPACT of 1992), (20) which resulted in FERC Order Number 888 (hereinafter FERC Order 888). (21)

   1. The Energy Policy Act of 1992

      The Energy Policy Act was enacted to help solve problems that had emerged in the electricity industry as a result of the National Energy Act of 1978. (22) The problems arose in the transmission component of the electricity system. (23) Transmission line owners were unwilling to allow competitors to use their infrastructure, even if the power produced was cheaper for end users. (24) Since "the transmission segment moves electricity from producers to consumers," it is essential to have open access to these lines for the market to operate properly. (25) To help solve this, EPACT of 1992 "gave FERC broad authority, subject to a public interest standard, to order 'virtually any transmission owning entity in the U.S. to wheel power for wholesale transactions.'" (26) To implement this legislative directive, FERC enacted Order 888 on April 24, 1996. (27)

   2. Federal Energy Regulatory Commission Orders 888 and 889

      FERC Order 888 opened the once regulated electricity market to competition. This regulatory act required all utilities to allow their transmission lines to be used by competitors. (28) FERC Order 888 significantly eliminated discrimination from the transmission industry by creating open access to the transmission system. (29) The problem before FERC Order 888 was that transmission owners were discriminating by limiting what generation could travel over their privately-owned lines. (30) This was a significant barrier to competition in the electricity market because consumers were not receiving the best-priced electricity, only the most favored. (31) FERC Order 888 began the process of deregulation in the United States because transmission customers were assured of competitively priced generation that was not being filtered by the transmission owners. (32)

      At about the same time FERC Order 889 was issued, which equalized the availability of information so participants could not gain preferential and unfair access to system information, which was a major problem before deregulation. (33) This Order required public utilities to establish an Open Access Same-time Information System (OASIS), which made available to transmission customers information on transmission capacity, prices, and other essential information necessary for a competitive market. (34) It also standardized the reporting and formatting of this information to make it even more accessible to customers or potential customers. (35) The creation of Independent System Operators (ISO) (36) was suggested at this time, (37) but FERC did not feel deregulation in the United States was ready for mandatory large-scale introduction of markets at this time. (38)

      Though FERC Orders 888 and 889 provided many benefits, they fostered an environment where larger centralized generation could grow. "Since Order No. 888 was issued, more than 40 applications have been filed for Commission approval of proposed mergers involving public utilities." (39) This rapid increase in the number of participants in the electricity market combined with unprecedented increases in consumer demand resulted in unanticipated consequences for the electricity system. Consequently, these changes have led to "the transmission grid ... being used more intensively and in different ways than in the past." (40) For instance, one study conducted by the United States Department of Energy in 2005 cited FERC's own concerns about the problems with "underinvestment in needed transmission" and the problems with "generation sitting in locations far from customers." (41) The Department of Energy also cited its own study that underscored the urgent problem of transmission congestion and strain. (42) With these concerns in mind, it seems logical that distributed generation would help to alleviate the growing transmission problems by placing the generation closer to the load, eliminating the need for additional transmission capacity. Therefore, distributed generation would not be a step backward to the days before regulation, but rather a step forward to meet these new problems.

3. ENERGY POLICY ACT OF 2005: THE FEDERAL ENERGY POLICY

   The modern federal energy policy is encompassed in the Energy Policy Act of 2005 (EPACT 2005), and was signed into law on August 8, 2005. (43) EPACT 2005 addresses a wide range of energy issues including efficiency, renewable resources, oil, gas, coal, nuclear, vehicle efficiency, and hydrogen, to name only a few. (44) This piece of legislation focuses on production capacity with little consideration of conservation and environmental concerns. (45) EPACT 2005 also sets mandatory electricity reliability rules and repeals the Public Utility Holding Company Act (PUHCA), eliminating the oversight power from the Securities and Exchange Commission (SEC) and transferring it to the FERC. (46) In the areas of renewable energy and distributed generation, however, a comprehensive and well defined commitment is surprisingly absent from the Act.

   1. Renewable Energy Under EPACT 2005

      Title II of EPACT 2005 is focused entirely on renewable energy. (47) EPACT adjusts the federal target percentages for renewable energy to 3% for 2007-2009, 5% for 2010-2012, and 7.5% for 2013 and beyond. (48) It also extends the energy production tax credit...